Create clear, appropriate
investment goals
Positive past performance can mean disappointing future returns
Annualized 36-month fund performance relative to benchmark
Morningstar
rating
0
Percentage points
–0.3
–0.6
Median performance
of funds versus style
benchmarks over the
36 months after a
Morningstar rating
–0.9
–1.2
–1.5
• The media’s focus on hot-performing
strategies can cause investors to flock to
highly rated funds. However, there’s no
guarantee that a fund’s recent success
will persist. The chart at left shows that the
highest-rated funds lagged their benchmarks
by the greatest amount over the subsequent
three years. The funds with the lowest
ratings did the best job of tracking their
benchmarks.
• By focusing on the markets, the economy,
or the performance of an individual security
or strategy, you’re likely to overlook the
principles that we believe can give you
the best chance of financial success.
• We believe that your financial advisor can
Notes: Past performance does not guarantee future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest
directly in an index.
Morningstar ratings are designed to bring returns, risks, and adjustments for sales loads together into one evaluation. To determine a fund’s star rating for a given time period,
the fund’s risk-adjusted return is plotted on a bell curve. If the fund scores in the top 10% of its category, it receives five stars; in the next 22.5%, four stars; in the middle 35%,
three stars; in the next 22.5%, two stars; and in the bottom 10%, one star. The overall rating is a weighted average of the available three-, five-, and ten-year ratings.
To calculate the median performance versus style benchmarks, Vanguard first assigned each fund to a representative benchmark according to size and style. We then
compared the performance of each fund with the performance of its style benchmark for each 36-month period since June 1992. Funds were grouped according to their
star ratings, and we then computed the median relative return versus the style benchmark for the subsequent 36-month period. Data are through December 2012.
Sources: Data on cash flows, fund returns, and ratings were provided by Morningstar. Index data to compute relative excess returns were provided by Thomson Reuters
Datastream. Morningstar data © 2013 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers;
(2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any
damages or losses arising from any use of this information. More information is available in the Vanguard research paper Mutual fund ratings and future performance
(Philips and Kinniry, 2010).
help you define clear, realistic goals and
design an investment plan around those
goals. This simple step can pay off
tremendously in helping you stay on
the path toward your financial goals.
Example of a basic framework for an investment plan
Objective
Save $1,000,000 for retirement, adjusted for inflation.
30-year horizon.
Moderate tolerance for market volatility and loss; no tolerance for nontraditional risks.1
Constraints
Current portfolio value: $50,000.
Monthly net income of $4,000; monthly expenses of $3,000.
Consider the effect of taxes on returns.
Willing to contribute $5,000 in the first year.
Saving or spending target
Intention to raise the contribution by $500 per year, to a maximum of $10,000 annually.
70% allocated to diversified stock funds; 30% allocated to diversified bond funds.
Asset allocation target
• A sound investment plan helps you stay
focused on the role of asset allocation
and diversification and on your intended
contribution and spending rates. Without a
plan, investors can become “fund collectors”
who chase performance, time markets, and
react to market noise.
• The planning process begins with your
objective(s) and any constraints, primarily
your tolerance for stock market risk.
• Defining these elements is essential because
the plan must be tailored for you. Because
most objectives are long-term, the plan
should be designed to endure changing
market environments.
Allocations to foreign investments as appropriate.
• Defining goals clearly and being realistic
Rebalancing
methodology
Monitoring and
evaluation
Rebalance annually.
Periodically evaluate current portfolio value relative to savings target, return expectations, and
long-term objective.
about ways to achieve them can help protect
you from common mistakes that could derail
your progress. A basic plan should include
specific, attainable expectations about
contribution rates.
Adjust as needed.
• Once the plan is in place, you’re encouraged
This example is completely hypothetical. It does not represent any real investor and should not be taken as a guide. Depending on an actual investor’s circumstances, such a
plan or investment-policy statement could be expanded or simplified. For example, many financial advisors or institutions may find value in outlining the investment strategy,
i.e., specifying whether tactical asset allocation will be employed, whether actively or passively managed funds will be used, and the like.
to evaluate it at regular intervals with
your advisor.
Source: Vanguard.
1
There are many definitions of risk, including the traditional definitions (volatility, loss, and shortfall) and some nontraditional ones (liquidity, manager, and leverage).
Investment professionals commonly define risk as the volatility inherent to a given asset or investment strategy. For more on the various risk metrics used in the financial
industry, see the 2007 Vanguard white paper An evaluation of risk metrics by Frank J. Ambrosio.
Connect with Vanguard® > vanguard.com
Vanguard Asset
Management Services™
P.O. Box 709
Valley Forge, PA 19482-0709
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or
protect against a loss.
Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limitedpurpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
© 2013 The Vanguard Group, Inc.
All rights reserved.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
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